The substantial shareholdings exemption is an exemption

Tax exemption

Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...

 from assessment of capital gains under corporation tax

United Kingdom corporation tax

Corporation tax is a tax levied in the United Kingdom on the profits made by companies and on the profits of permanent establishments of non-UK resident companies and associations that trade in the EU. Prior to the tax's enactment on 1 April 1965, companies and individuals paid the same income tax,...

 applicable to United Kingdom

United Kingdom

The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

 companies. The exemption is found in Schedule 7AC of the Taxation of Chargeable Gains Act 1992

Taxation of Chargeable Gains Act 1992

The Taxation of Chargeable Gains Act 1992 is an Act of Parliament which governs to levying of capital gains tax in the United Kingdom. Capital gains tax is a tax charged on the increase in the capital value of an asset between purchase and sale of that asset....

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The rationale for the exemption is that groups of companies should be able to restructure

Restructuring

Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs...

 without having to concern themselves with taxation of capital gains.

Similar provisions apply in jurisdictions such as the Netherlands

Netherlands

The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...

, which has a participation exemption

Participation exemption

Participation exemption is a general term relating to an exemption from taxation for a shareholder in a company on dividends received, and potential capital gains arising on the sale of shares.- Background :...

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Eligibility

To qualify for the exemption, a disposal must meet all of the following criteria:

• The disposing company must dispose of shares or an interest in shares of another company.
• The company must have held a "substantial shareholding" in the other company for a continuous period of at least 12 months in the preceding two years. A substantial shareholding means a shareholding in respect of which the following conditions are met:
  • The disposing company holds at least 10% of the ordinary share capital of the other company;
  • The disposing company is entitled to at least 10% of profits
    Profit (accounting)
    In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
    
     available for distribution; and
  • The disposing company would be entitled to at least 10% of the other company's assets on a liquidation
    Liquidation
    In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
    
    .
• The disposing company must be a trading company or a member of a trading group.
• The other company must be a trading company or the holding company of a trading group.

The last two conditions must be met:

• throughout the period:
  • beginning at the same time as the 12-month period referred to in the first condition begins, and
  • ending at the time of the disposal; and
• immediately after the disposal.

Applicability

The exemption only applies to disposals of shares made on or after 1 April 2002. The relief is automatic, meaning that a company does not have to submit a claim to Her Majesty's Revenue and Customs

Her Majesty's Revenue and Customs

Her Majesty's Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes and the payment of some forms of state support....

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